Will Olympics become a watershed in China's economy?

2008-07-18 12:28:50 GMT       2008-07-18 20:28:50 (Beijing Time)       Xinhua English

by Xinhua Writers Lin Jianyang, Xu Xingtang

BEIJING, July 18 (Xinhua) -- Lin Wenshui, the owner of a jade-processing workshop with four employees in South China's Guangdong Province, still couldn't believe his business had become so slack in just a few months.

At the beginning of this year, Lin had estimated that he might earn at least 200,000 yuan (29,325 U.S. dollars) for 2008.

Things, however, went awry. So far this year, his workshop could hardly make ends meet. He had to dismiss five employees over the months and gradually halved the monthly expenditure from 40,000 yuan to less than 20,000 yuan.

"Dealers tell me there are few jade buyers out there now. Many factories in Guangdong and other regions were closed and bosses went bankrupt. In addition, a lot of investors have lost on the stock trading since share prices tumbled," said the 31-year-old.

He was right. Guangdong, China's traditional export powerhouse, was seeing an unprecedented wave of factory closures owing to rising prices of raw materials, export tax rebate cut and the appreciation of the Chinese yuan.

According to an estimate by the Federation of Hong Kong Industry, 10 percent of the 60,000-70,000 Hong Kong-owned factories in Guangdong would close down this year.

Guangdong was not alone, however. In Zhejiang, the country's another major exporter, about 10,700 enterprises incurred losses in the first five months, accounting for nearly 20 percent of the province's total companies, according to figures by the Zhejiang Economic and Trade Commission.

Nationwide, China's export in the first half stood at 666.6 billion U.S. dollars, up 21.9 percent year on year, but 5.7 percentage points lower than last year's growth.

While on the Chinese stock market, many investors suffered substantial losses as the market had witnessed a nosedive since late last year.

The benchmark Shanghai Composite Index closed at 2,684.78 points on Thursday, down 0.78 percent in the day, and off about 57percent from the market's peak of 6,124 points recorded last October.

Such a rare plunge had led to widespread loss among investors. According to last month's survey among netizen investors conducted by China's flagship television CCTV, more than 92 percent of the total 700,000 respondents said they suffered loss in the stock trading. Nearly 60 percent of the surveyed said they lost more than 50 percent of their investment.

Amid falling export growth and plummeting share prices, many in China were asking whether the country's economy would slip into recession after the August Olympic Games, especially after reviewing past Olympic host countries, most of which experienced post-Olympic troughs in their economy.

As China reported fewer exports, the country's gross domestic production also slowed down, since exports contributed nearly 35 percent of China's GDP.

According to the National Bureau of Statistics (NBS) on Thursday, China's GDP reached 1.3062 trillion yuan in the first half of the year, up 10.4 percent over the same period last year but 1.8 percentage points lower than last year's growth rate. In breakdown, the growth for the second quarter of this year was 10.1percent, 0.5 percentage points lower than the first quarter.

The consumer price index (CPI), the main gauge of inflation, rose 7.9 percent year on year in the first half of this year, after it hit a 12-year high of 8.7 percent this February, the NBS figures showed.

Economic officials and analysts, however, said such a slowdown was widely expected, based on both the economic policies that had been adopted by China and mounting global economic tensions.

"The slowdown falls within expectations of our macro-economic controls. And despite the slowdown, the growth rate is still high," the NBS spokesman Li Xiaochao told a press conference on Thursday.

To prevent the economy from becoming overheated was one of the two primary targets set by the Chinese government for 2008, Li said. The other was to guard against galloping inflation.

To this end, China had since late last year churned out a series of tight macro-economic control measures in an effort to cool down the economy and fight inflation.

Notably, for the first time in 10 years, China decided last December to shift its monetary policy "from prudent to tight" in 2008 to prevent overheating and a surge in inflation.

Economic analysts agreed with Li's viewpoints.

Zhuang Jian, a Beijing-based senior economist with the Asian Development Bank (ADB), told Xinhua right after NBS' figure release that China's macro-economic controls, particularly the tight monetary policy, contributed to the slowdown.

The world's economy was on a downward track, not only in the U.S. and Europe, but also in Asia, and such a slowdown had hit China's foreign trade, one of the country's three major growth locomotives, Zhuang said.

While Zhuang and other analysts also warned of the challenges facing the Chinese economy as the U.S. credit crisis was still far from over, a large number of China's exporters and other small- and medium-sized companies were undergoing hard times, and the soaring prices of energy and raw materials were set to stoke China's domestic inflation pressures.

"The CPI is still at a high level and more efforts from the Chinese government are needed," Zhuang said.

On the other hand, China needed to ensure an economic soft landing -- a slight slowdown in economic activity -- and prevent the economic growth from suffering a big drop, warned the ADB economist.

With a slowdown in place, many analysts are now focusing on where the Chinese economy is heading in the second half. The economy has pulled through the severe tests of two great natural disasters in the first half -- the winter blizzard this February and the 8.0-magnitude earthquake in May, but will it succumb to the so-called Post-Olympics Effect?

The Post-Olympics Effect refers to the phenomenon that some economies were hit by a post-Olympic economic downturn, or called "Valley Effect" or "V-low Effect".

The phenomenon was mainly caused by a dramatic investment increase at the pre-Olympic stage, accompanied by a boom in consumption and revenues. But the investment and consumption plunged following the Olympics while the host city would have to shoulder the heavy burden of maintaining idle sports venues.

According to the Bank of China (BOC), which conducted a study of 12 Olympic games spanning 60 years, most economies of the hosts suffered from the Post-Olympics Effect.

In nine of the 12 Olympics, including the 1988 Seoul and 1992 Barcelona Olympics, the hosts' annual GDP growth in the eight years following the Games was 0.4 to 2.5 percent lower than during the eight years prior to the event, the BOC study showed.

Then how about the post-Olympics Chinese economy?

According to Li Xiaochao, the spokesman, history showed that a post-Olympics downturn happened mainly in smaller economies, such as the Republic of Korea, while large economies such as the United States had not experienced such a downturn.

"The Olympic Games is lending strength to the Chinese economy. But the trend of development will be determined by the fundamentals of the Chinese economy itself," said Li.

"Based on figures of the first half, the overall Chinese economy is in good shape," said the spokesman. "Currently there are two major sources of pressure for China's economy, one is inflation and the other employment. We will try our best to find a balancing point between the two sources."

Andrew Michael Spence, the 2001 Nobel Prize winner for economics, had said that the post-Olympics effect would not have much fallout in the Chinese economy.

"I don't think that the falling-off will be very big in the Chinese economy case. There are two things to say. One is it's a big market now, so you can sustain growth on the domestic market. Secondly, from the point of the view of the rest of the world, China now is an important source for global growth, so everybody has a common interest or a shared interest in Chinese economic growth," he told CCTV.

Fan Gang, member of the Monetary Policy Committee under the People's Bank of China, the country's central bank, had expressed similar views on many occasions.

In mid-June at a forum on the Olympic economy, he said that the Chinese economy was set to grow healthily and steadily after the Games and a post-Olympic downturn was highly unlikely.

According to Fan, Beijing's investment to build sports venues and other infrastructure, though worth tens of billions of dollars, accounted for a mere three percent of the country's total investment in fixed assets.

"China is a big country. Beijing is small.... Even if Beijing’s investment in infrastructure drop sharply after the Games, it would not have a significant impact on the whole economy," said the noted economist.

Fan added that it was unlikely that Beijing would slash fixed assets investment since the city was still at the early stage of economic development and its appetite for infrastructure would still be huge after the Olympics.

"Over the past several years, Beijing has been forced to reduce some other infrastructure projects in order to concentrate on the construction of sports venues," he said.

At the national level, Fan said China had been taking serious macro-economic control measures to adjust its economy since the end of 2007 and the economy would probably not be subject to further adjustments after the Olympics.

"Our growth rate has dropped, exports decreased and the foreign trade surplus has declined. We cooled down the stock market and real estate market," Fan said. "Such adjustment and micro-economic control measures certainly reduce possibilities of a post-Olympic downturn."

Guo Zhixiao, a Beijing-based investor in his 40s who had lost heavily in stock trading, said he expected the Chinese stock market to rebound significantly in the next three months thanks to the hosting of the Olympics.

And on the post-Olympics economy, he sounded more upbeat than economists, saying the Chinese economy was likely to grow more healthily and stably after the Games because the nation and the government would be able to put more attention on the economy and adjust it more freely.

"If the Chinese economy unfortunately slumps into recession, it should largely be the result from a global economic crisis," Guo claimed.

As China released its economic figures for the first half, top Chinese policy-makers were expected to soon convene a high-level routine meeting to analyze the country's overall economic situation, during which policies for the second half would be determined.

Many economic analysts were trying to figure out what kinds of economic policies would come out from the government meeting.

Zhuang, of the ADB, maintained that China was not expected to make big changes to those fundamental policies implemented in the first half.

"Since those fundamental policies have not realized their goals, it is necessary for the government to stick to them," Zhuang said.

"But the government was very likely to introduce some minor policy adjustment by employing monetary and fiscal tools. For instance, the country might probably adopt some favorable policies to help those exporting companies overcome the current difficulties," he said.

Other Chinese analysts shared Zhuang's views.

Gao Huiqing, Director of the Strategic Planning Division of the Development Research Department under the State Information Center, said those basic policies set out early this year, such as the tight monetary policy, would continue to stay put but some technical policy adjustment was expected.

There were a huge number of exporting companies in East and South China, such as Jinwoniu, which were facing formidable pressure of survival, and there were chances that the government would raise export tax rebates for them, according to Gao.

There were reports saying the Ministry of Commerce had made a formal proposal to the State Council, the Cabinet, that the pace of the yuan appreciation should be slowed and tax rebates raised to prevent a significant decrease in exports.

The Ministry of Commerce said in its proposal that exporting companies needed more time to adjust to the changing situation; otherwise a lot of enterprises would close, according to an earlier report by the Nanfang Daily.

In fact, many Chinese companies had anticipated some changes to current policies since early this month when four senior Chinese leaders carried out field investigation tours to four major Chinese exporting regions, namely Guangdong, Jiangsu, Shanghai and Shandong.

In this rare wave of investigation tours, Premier Wen Jiabao visited Jiangsu and Shanghai, Vice President Xi Jinping went to Guangdong, Vice Premier Li Keqiang traveled to Zhejiang while Vice Premier Wang Qishan toured to Shandong.

Lin Wenshui, the workshop owner, read something positive from the news.

"When Xi came to Guangdong, there were many news reports. And Many people here felt that things would change for the better, sooner or later," Lin said. "I will try to hold on to the end of the year, and after that, I think my business will recover."

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